Details
| Original language | English |
|---|---|
| Pages (from-to) | 672-708 |
| Number of pages | 37 |
| Journal | SIAM Journal on Financial Mathematics |
| Volume | 8 |
| Issue number | 1 |
| Publication status | Published - Jan 2017 |
Abstract
Systemic risk refers to the risk that the financial system is susceptible to failures due to the characteristics of the system itself. The tremendous cost of systemic risk requires the design and implementation of tools for the eficient macroprudential regulation of financial institutions. The current paper proposes a novel approach to measuring systemic risk. Key to our construction is a rigorous derivation of systemic risk measures from the structure of the underlying system and the objectives of a financial regulator. The suggested systemic risk measures express systemic risk in terms of capital endowments of the financial firms. Their definition requires two ingredients: A cash ow or value model that assigns to the capital allocations of the entities in the system a relevant stochastic outcome; and an acceptability criterion, i.e., a set of random outcomes that are acceptable to a regulatory authority. Systemic risk is measured by the set of allocations of additional capital that lead to acceptable outcomes. We explain the conceptual framework and the definition of systemic risk measures, provide an algorithm for their computation, and illustrate their application in numerical case studies. Many systemic risk measures in the literature can be viewed as the minimal amount of capital that is needed to make the system acceptable after aggregating individual risks, hence quantify the costs of a bail out. In contrast, our approach emphasizes operational systemic risk measures that include both ex-post-bailout costs as well as ex-Ante-capital requirements and may be used to prevent systemic crises.
Keywords
- Capital regulation, Financial contagion, Monetary risk measures, Set-valued risk measures, Systemic risk
ASJC Scopus subject areas
- Mathematics(all)
- Numerical Analysis
- Economics, Econometrics and Finance(all)
- Finance
- Mathematics(all)
- Applied Mathematics
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In: SIAM Journal on Financial Mathematics, Vol. 8, No. 1, 01.2017, p. 672-708.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Measures of Systemic Risk
AU - Feinstein, Zachary
AU - Rudloff, Birgit
AU - Weber, Stefan
PY - 2017/1
Y1 - 2017/1
N2 - Systemic risk refers to the risk that the financial system is susceptible to failures due to the characteristics of the system itself. The tremendous cost of systemic risk requires the design and implementation of tools for the eficient macroprudential regulation of financial institutions. The current paper proposes a novel approach to measuring systemic risk. Key to our construction is a rigorous derivation of systemic risk measures from the structure of the underlying system and the objectives of a financial regulator. The suggested systemic risk measures express systemic risk in terms of capital endowments of the financial firms. Their definition requires two ingredients: A cash ow or value model that assigns to the capital allocations of the entities in the system a relevant stochastic outcome; and an acceptability criterion, i.e., a set of random outcomes that are acceptable to a regulatory authority. Systemic risk is measured by the set of allocations of additional capital that lead to acceptable outcomes. We explain the conceptual framework and the definition of systemic risk measures, provide an algorithm for their computation, and illustrate their application in numerical case studies. Many systemic risk measures in the literature can be viewed as the minimal amount of capital that is needed to make the system acceptable after aggregating individual risks, hence quantify the costs of a bail out. In contrast, our approach emphasizes operational systemic risk measures that include both ex-post-bailout costs as well as ex-Ante-capital requirements and may be used to prevent systemic crises.
AB - Systemic risk refers to the risk that the financial system is susceptible to failures due to the characteristics of the system itself. The tremendous cost of systemic risk requires the design and implementation of tools for the eficient macroprudential regulation of financial institutions. The current paper proposes a novel approach to measuring systemic risk. Key to our construction is a rigorous derivation of systemic risk measures from the structure of the underlying system and the objectives of a financial regulator. The suggested systemic risk measures express systemic risk in terms of capital endowments of the financial firms. Their definition requires two ingredients: A cash ow or value model that assigns to the capital allocations of the entities in the system a relevant stochastic outcome; and an acceptability criterion, i.e., a set of random outcomes that are acceptable to a regulatory authority. Systemic risk is measured by the set of allocations of additional capital that lead to acceptable outcomes. We explain the conceptual framework and the definition of systemic risk measures, provide an algorithm for their computation, and illustrate their application in numerical case studies. Many systemic risk measures in the literature can be viewed as the minimal amount of capital that is needed to make the system acceptable after aggregating individual risks, hence quantify the costs of a bail out. In contrast, our approach emphasizes operational systemic risk measures that include both ex-post-bailout costs as well as ex-Ante-capital requirements and may be used to prevent systemic crises.
KW - Capital regulation
KW - Financial contagion
KW - Monetary risk measures
KW - Set-valued risk measures
KW - Systemic risk
UR - http://www.scopus.com/inward/record.url?scp=85041564382&partnerID=8YFLogxK
U2 - 10.1137/16m1066087
DO - 10.1137/16m1066087
M3 - Article
VL - 8
SP - 672
EP - 708
JO - SIAM Journal on Financial Mathematics
JF - SIAM Journal on Financial Mathematics
SN - 1945-497X
IS - 1
ER -